Life insurance can seem complex and overwhelming.
There are so many options to select from, and so little time as parents to weave in and out of the fine print.
Which is probably why a recent survey shows that Canadian parents are consistently getting the wrong type of insurance for their family.
Among the 77% of Canadian parents with life insurance, only 33% have term life insurance, the type of life insurance most people actually need (and, happily, is the most affordable too).
Many other Canadian parents also rely on mortgage life insurance, whole life insurance or group life insurance, which don’t offer enough protection for their families.
So it’s not only important to get life insurance. It’s important to get the right kind, too.
Here are five of the biggest life insurance mistakes parents will want to avoid, and what to do instead. We’ve also created a handy infographic to help put things in perspective.
A quarter of Canadian parents (25%) with kids under the age of 18 have mortgage life insurance.
It’s not difficult to see why: when monthly mortgage payments and hockey school fees and child care expenses add up, it’s convenient to tack on life insurance premiums to either of those existing bills.
But what parents often overlook is that mortgage life insurance is for banks and creditors.
When one spouse dies, the death payout does not go to the partner or their kids. Instead, it covers the outstanding mortgage. Your beneficiaries will not receive any monetary benefit, nor will they be able to decide what to do with it.
Because this type of life insurance usually requires no underwriting, there’s also a chance that your claim will be denied, especially if you have a medical condition but fail to disclose this properly while purchasing the policy.
It’s also worth pointing out that the death benefit is typically equivalent to your outstanding mortgage. So even as you pay a fixed premium every month, the payout decreases as your mortgage is paid off.
Caveat: mortgage life insurance may be an option for parents with medical conditions who are unable to get standalone life insurance.
The Takeaway: Most parents will be better able to protect their families with a term life insurance policy instead. In addition to being more affordable, it gives beneficiaries the flexibility to do what they wish with the payout, instead of the money going directly to creditors.
The survey also reveals that 22% of Canadian parents have purchased permanent life insurance, also known as universal or whole life insurance.
Unlike term life insurance, which covers you for a fixed ‘term’ such as 10 or 30 years, permanent policies are effective as long as you’re paying premiums. Regardless of when you pass away, your partner and children will receive a death benefit.
Permanent life insurance is useful for parents who, even after they retire, may still have to consider supporting children with special needs. This type of policy also serves as an investment, with a cash value that grows over time.
However, permanent life insurance is easily five to 15 times more expensive than term life insurance.
Nearly 88 per cent of permanent policies never pay out, as policyholders eventually stop paying their premiums.
Plus, there are hefty cancellation charges and often other fees or risks in the fine print.
All of this to say that permanent policies are best recommended for high-net-worth individuals; those who have maxed out their TFSAs and RRSPs, and are looking for additional ways to invest their money.
The Takeway: For most parents, a term life insurance policy is the best option. It’s affordable, coverage is sufficient and it’s available to you until your kids become adults and self-sufficient on their own.
Another big mistake parents make is purchasing life insurance specifically for their child. Yes, life insurance exists for children, too.
According to the survey, 23% of Canadian parents have opted for this unnecessary policy, often as a way to put money aside for their kids.
Here’s what parents are typically sold on re: life insurance for their kids:
That said, the chances of a child passing away at a young age are low. This cash value also grows very slowly over time, so it’s better to put away that money in a savings account.
The Takeaway: Instead of getting an insurance policy for your child, consider adding child term riders to your own term life insurance. This add-on is cheaper compared to monthly premiums for an individual child’s policy. Plus, once your children are adults, they can then choose to convert their coverage to a term life insurance policy of their own.
Leaning on group life insurance, or employer-provided life insurance, is another attractive option: 70% of parents rely on it and it’s a great employee benefit to have.
It’s also typically free and coverage is generally guaranteed; there’s no need for medical underwriting to qualify.
However, considering the coverage you’ll get, you may also be paying more in monthly premiums.
The death benefit from group life insurance policies is low, typically only a multiple of your annual salary.
If you’re the sole breadwinner of your family, have multiple children or children with special needs, you’ll want coverage that’s greater than twice the amount of your annual salary. Consider supplementing company-provided life insurance with a term life policy of your own.
You can do this through your company’s insurance provider, but also consider shopping around for potentially better premium rates.
Relying solely on group life insurance means your family’s financial safety net is tied to your employment.
If you get sick or injured, and have to resign from work, you risk losing the policy just when you need it most.
Unpredictable events also come up, such as getting laid off, or your company deciding to no longer provide life insurance.
The Takeaway: For financial protection that’s sound and reliable, a term life insurance is a better option. This way, your partner and children will be financially taken care of regardless of what happens to the economy, your company, or your job.
Parenthood is a gift, and a challenging one at that.
The impulse to reach for what’s immediately available, such as life insurance through work, or the most convenient, such as mortgage life insurance when buying a house, is perfectly understandable.
Besides, life insurance can be expensive—50% Canadian parents without it say this is precisely why they haven’t bought life insurance.
But reality couldn’t be much further. A 20-year term life insurance policy, for instance, that’s worth $500,000 costs only about $35 a month for a healthy 30-something. That’s roughly one latte per day, seven days a week (so, yes, you’re likely spending more per month on coffee).
Only 33% of parents with children under 18 have the more affordable term life insurance, which happens to be the type of life insurance most parents need.
Several factors determine how much your monthly premiums will cost: your coverage amount, your age, smoking status, health, driving record and hobbies, and the term itself.
For 95% of young families, a term of 10, 20 or 30 years is typically sufficient.
The Takeaway: Term life insurance is always more affordable than a permanent policy, more flexible than mortgage life insurance and more reliable than life insurance from work. Plus, it gives you more value for your money than a policy specifically for your child.
To get an idea of how much term life insurance you need and how much it’ll cost monthly try our quick quote calculator. All you need to enter is your date of birth, gender, smoking status and term length.
You don’t necessarily have to pay more for life insurance to ensure better protection for your family.
At the end of the day, life insurance is about protecting those who are financially reliant on you.
Mortgage life insurance protects your mortgage, and ultimately benefits financial institutions.
Permanent life insurance is five to 10 times more expensive, best serving individuals with high net worth looking for additional ways to invest their money.
Life insurance for a child yields less compared to a savings account, while group life insurance is insufficient in its coverage and, at worst, unreliable.
To protect those who are financially dependent on you, term life insurance is an affordable, flexible and reliable option. Find out how affordable it can be and pay only for the life insurance coverage you need.